Credit Basics

Today, to get approved for a mortgage and qualify for the best rates, good credit is more important than ever. When you apply for a mortgage to purchase or refinance a home, lenders need to determine your credit worthiness. They look at your credit score, most often the FICO Score, along with factors like your debt-to-income ratio, employment and credit history.

Your credit score helps HomeBridge decide on the size and cost of a loan and predicts, based partly on your past behavior, how likely you are to repay the mortgage. Lenders use this score to help determine what type of mortgage you’re eligible for, whether to approve your loan and your interest rate.

Here are some ways to raise your credit score, but be patient – it may be two to three months before you see the increase.

Correct your credit history

Reviewing your credit report and correcting mistakes can raise your score, which is based on your credit history.

Reduce the amount you owe on credit cards

Pay down all card balances, so the amount you owe is below 30% of the card’s credit limit. This is called your “utilization ratio.” If your limit is $1,000, for example, you want to owe no more than $300. If you can’t pay down a balance, try moving it. One card may be maxed out, but if others have small balances, move some of the big balance to the other cards, so all three have less than a 30% utilization ratio. Also try raising a card’s limit – call the bank and ask. An $850 balance on a card with a $1,000 limit is an 85% utilization ratio. Get the limit up to $3,000 and that utilization ratio goes below 30%.

Start using a card you haven’t touched for a while

This sends a report to the credit bureaus, increasing your available credit and helping the utilization ratio. And since the length of your credit history contributes to 15% of your score, using an old card might help there too.

Pay all bills on time

Just one 30-day late payment can lower your credit score 40 to 80 points. Make sure you always pay on time, even if you’re only paying the minimum.

Focus on revolving accounts versus installment accounts

Revolving accounts, such as credit cards, let you carry a balance and pay a monthly minimum amount. Installment accounts require you to pay a fixed amount each month, like an auto loan. If you have money available, use it to pay down your credit card balances, not to pay off your auto loan sooner. This is because your credit score is heavily weighted to revolving accounts.

Don’t open a new account

This lowers your score temporarily and makes a new creditor, like a mortgage lender, less eager to open another account for you.

DON’T close any accounts

This lowers the amount of credit available to you and therefore lowers your credit score.